Compare your home equity line of credit options

Take advantage of the equity in your home to make renovations, invest in property and more.

Whether you’re planning to access your existing equity to finance a renovation, buy property or fund your “bucket list” retirement plans, a home equity line of credit (HELOC) can help you reach your personal and financial goals.

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What is a home equity line of credit?

A home equity line of credit allows you to borrow money using the equity in your property. Your property acts as collateral for the line of credit, which means if you don’t pay back the loan, the lender can repossess or sell your property.

A HELOC is similar to a loan in that the borrower and lender come to an agreement on how much equity can be borrowed and the time period for when the money needs to be paid back. The lender typically sets the initial limit to the credit line using similar criteria to a regular home loan.

Unlike a regular loan, a HELOC is a revolving line of credit that allows the borrower to access funds as they’re needed, and the money doesn’t have to be used all at once. It works a lot like a credit card. You’re given a set amount you can borrow and a draw period, which is the amount of time you have to withdraw money as you need it — usually five to 10 years.

HELOCs generally come with two different types of draw periods:

• Draw period where you can pay on interest and the principal
• Interest-only draw period

Any amount you pay toward the principal then goes back into your credit line, which means you can borrow it again. Being able to pay down both the interest and principal on your HELOC during the draw period will help you pay off your loan faster.

Once your draw period is up, your repayment period begins. This is when you start paying back the entire balance you borrowed, including interest. Most HELOCs come with a repayment period of 10 to 20 years.

How is interest calculated?

HELOCs usually come with variable interest rates that are tied to a benchmark rate, like the Wall Street Journal prime rate, and fluctuate over time. How you decide to withdraw funds determines how much interest you’ll pay — meaning you’ll only accrue interest on the amount of equity you’re actively using.

For instance, if you have a line of credit for $50,000 but you only need $30,000 for a home renovation, you’ll pay interest on the $30,000 and not the remaining $20,000. If you use another $10,000 for vacation, you’d pay interest on the total amount withdrawn — $40,000 — with a $10,000 line of credit left over.

How much does a HELOC cost?

Some lenders charge monthly or annual fees on a home equity line of credit, with the average annual fee no more than $100.

You may also be charged origination, inactivity and closing fees — depending on your lender.

• What interest rates can I expect with a HELOC?

  Interest rates on a home equity line of credit will vary depending on if you opt for a variable or fixed rate. Variable interest rates can range from 3.99% to 8.24%, while fixed interest rates can range anywhere from 5.78% to 8.49%.

• How can I minimize the interest?

  The most obvious way to cut down on interest is by only borrowing what you absolutely need from your HELOC — as interest is calculated on the withdrawn funds only. Then to save even more money over the life of your loan, you can make payments on both interest and the principal during the draw period, as well as extra payments during the repayment period.

• When do I have to start repayments?

  Once money has been taken from the HELOC during the draw period, you’ll usually only have to make interest-only payments on the amount you borrowed. Some lenders will allow you to make payments toward the principal as well, which can help reduce the total cost of your loan over time. If you decide to make repayments toward the principal, that money can be added back in to the line of credit to borrow again.

  After the draw period is over, your repayment period begins. This is when you’ll be on the hook for paying off the total amount you borrowed, plus any interest that accumulated.

What fees can I expect with a HELOC?

It all depends on the lender you choose to use, however, these are some of the most common fees that are associated with a home equity line of credit.

• Application fee. Some lenders charge an application fee in order to process your application. In cases where an application fee is charged, it’s not uncommon for the lender to refund the fee if you move forward with the HELOC.
• Appraisal fee. Not all HELOCs have an appraisal fee, but those that do normally charge around $300 to cover the cost for an appraiser to calculate the value of your home.
• Closing costs. The average closing cost is about 2% to 5% of the loan amount. This fee is what you pay to have your home equity line of credit set up. It can include the appraisal fee, the application fee or the attorney’s fee. You can ask your lender to waive this fee, or at least negotiate for better terms.
• Cancellation or early termination fee. If you cancel your home equity line of credit shortly after opening it, you could be subject to an early closure fee of around $100 to $500.
• Annual fee. Throughout the duration of a HELOC, you’ll generally be charged an annual fee of anywhere from $50 to $100, though some lenders waive the fee the first year.
• Transaction fee. There may be a fee every time you draw from your home equity line of credit that is added to the overall loan amount.
• Inactivity fee. You may incur some non-usage charges that could cost you around $100 a year if you don’t draw upon your HELOC annually. Be sure to negotiate having this fee removed if it’s attached to your line of credit, as there are many lenders who won’t charge you an inactivity fee.
• Prepayment fee. You could be charged a fee of up to $500 if you pay off your balance and close your account within three to five years of opening it.

What can I use a HELOC for?

You can use the money in a home equity line of credit for any legitimate purpose — a vacation, to renovate a home or make repairs, to pay bills or to buy a new car.

You don’t need to notify your lender about what the money will be used for — simply withdraw the money from the account.

What are the features of a home equity line of credit?

There are many features of a line of credit that make it distinct from other types of financing.

• Structure. This type of loan allows you to use money from a credit limit as needed — similar to how a credit card works. A borrower could be approved for a $100,000 credit limit, but only use $75,000 of it.
• Draw period. Usually five to 10 years, this is the amount of time you have to withdraw money from your line of credit.
• Repayment period. Typically lasting 10 to 20 years, this period begins after the draw period ends. During this time, you have to make repayments on the total amount you borrowed, including interest.
• Interest is only due on withdrawn amounts. Borrowers only have to pay interest on the amount of money that was used, not on the total amount of available credit. This means that you’re not charged interest on unused money. It’s a good incentive for people to avoid withdrawing extra money and only use as much as they need.
• Credit limit. The credit limit of a HELOC is dependent on your property’s value and the percentage of equity that the lender approves you to borrow against, your credit history and your income. The more your property is worth, the higher your credit limit will likely be.

How to calculate the equity you have in your home

Pros and cons

Tips for managing a HELOC

There’s a lot to think about when considering a home loan, no matter what type you’d like to get and what you intend to use the funds for.

Here are some tips to keep in mind:

• Minimize the amount of interest payable on your HELOC by making payments on the principal during the draw period.
• Don’t withdraw more funds than you need.
• Compare a range of HELOCs to ensure you’re getting a competitive deal.
• Keep at least 20% equity in your home in case house prices fall.

How can I apply for a line of credit home loan?

If you’re applying for a line of credit, you’ll likely need to be at least 18 years old and provide the following information:

How do I compare HELOCs?

The best way to compare HELOCs is to analyze the interest rates and fees.

Lines of credit typically come with lower interest rates than home equity loans, but the rates are normally variable. This means they’ll fluctuate based on movements in a benchmark rate, like the Wall Street Journal prime rate. Some lenders may allow you to convert your loan balance to a fixed rate, however, during the draw period.

Most lines of credit also carry fees to cover the administrative cost of setting up and managing the loan account.

Should I take out a HELOC?

If you’re thinking of taking out a HELOC, you should consider whether:

• You have the discipline to stick to a budget.
• You have not borrowed against equity that has been calculated on an inflated price.
• You have the restraint to not use all the funds at once.
• You have a cash buffer to protect yourself from rising interest rates.

Bottom line

A home equity line of credit can give you a financial cushion. But before you apply, make sure you understand the consequences of what could happen if you fail to pay it back.

Like any line of credit, you should have a firm blueprint of what you can budget toward repayments and a plan of attack for paying back what you owe. If you’ve nailed down both of these factors, then you might want to consider using a HELOC to invest in real estate, start a business, renovate your home or even go on your dream vacation.
Home loans 101

Frequently asked questions

• What credit score is needed for a HELOC?

  In general, you’ll need a credit score of at least 620 to be approved for a HELOC — although specific requirements will vary by lender. Even though you’re drawing upon the equity of your home, lenders will still want to see that you can mange a line of credit.

• Are there any restrictions for what I can use a HELOC for?

  No. You can use the line of credit for any legitimate purpose.

• Can you increase the HELOC amount?

  You can, but you’ll have to apply for it. Because most lines of credit are capped when the HELOC is initially processed, you can’t simply ask to have an increase — even if you have the equity.

• How long is a typical term for a home equity line of credit?

  Most home equity lines of credit have 25-year terms. The first five to 10 years are the draw period when you can withdraw funds. You’ll usually only have to make payments on interest during this time, though some lenders will allow you to make payments toward your principal as well. The latter 15 to 20 years are the repayment period, in which you’re responsible for paying the borrowed amount back in full, including interest.

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  Most of the time a home equity line of credit will have a closing cost of 2% to 5% of the loan amount. However, there are some lenders that waive closing costs — like Chase Bank and Bank of America.

• Can I pay off my HELOC early?

  Absolutely. If you pay off your home equity line of credit well before the repayment period is over, the lender will typically give you the option to either close the account or keep it open for future withdrawals.